Financial Times

Tax system leaking from one end, adding from the other
By Dilshani Samaraweera

Sri Lanka’s tax system is seen as unpredictable, aimed at taxing success and discouraging private enterprise. Speaking at the Annual Oration on Taxation at the Institute of Chartered Accountants of Sri Lanka, Minister of Enterprise Development Sarath Amunugama, said the coming national budget in November should “clean up” the country’s tax system. He said the tax system was leaking revenues on one end while adding unplanned taxes on the other end, and was becoming cluttered.

“Many avenues of tax gathering have been shut down. For instance, 21 items were taken out of the VAT list because of increasing fuel and food prices,” said Minister Amunugama.“The decline in tax incomes from motor vehicles is another significant loss. Duty free vehicle import concessions started from Secretaries of Ministries but have now spread all the way to Provincial Councils.”

Incomes from cash cows like tobacco and alcohol are also stagnating. “Increasing taxes on tobacco and alcohol are showing a declining trend in revenues,” he said. Meanwhile, new, unplanned taxes in the form of cess and levies are adding onto the tax system, outside the original budgeted structure.

“There are a growing number of ‘extra normal’ taxes. Hopefully the next budget can clean these up,” said the Minister. “Trying to collect the maximum out of taxes is now under threat because of ad-hoc decisions,” he said.

The Minister noted that the tax system also specifically targeted growing industries like the telecom and the banking sectors. “Telecom is a success story. If they were smaller they would not be taxed. So we are taxing success,” said the Minister. The minister noted that these factors discouraged private enterprise. “I do not think we should increase the tax burden any further on corporates,” said the Minister. Instead, to generate more tax revenues, it is recommended that the Inland Revenue, Customs and Excise departments target increased tax compliance and draw more individuals and businesses into the existing tax net.

The Minister also called for a review of the tax system to accommodate changes in the global investment climate. “Now, all the countries in the region are competing for foreign investments. So we need a strong comparative advantage. We need to look into our concession regime to develop this,” he said.

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